Is The 'Fiscal Cliff' As Bad As It Sounds?

I'm Michel Martin and this is TELL ME MORE from NPR News. Coming up, last year the Occupy Wall Street movement dominated headlines for weeks and added terms like the 99 percent to our political vocabularies. But a year after the protests started we wanted to know where the movement stands now. We're going to call writer and activist Debra Dickerson about this. She's at the heart of the anniversary protest. That's later in the program.

First, though, we want to spend some time today talking about a term that we think we will be hearing a lot in the coming weeks - it's the fiscal cliff. And that refers to two events that could dramatically change the economic landscape in this country. In January major tax cuts are set to expire and mandatory budget cuts are scheduled to go into effect unless Congress is able to agree on a compromise.

That sounds complicated, so we've called two of our trusted economic experts to explain it for us. Marilyn Geewax is NPR's Senior Business Editor and Sudeep Reddy is economics reporter at the Wall Street Journal and they're both with us from time to time to explain complicated things like this and they're both back with us now. Welcome to you both. Thanks so much for joining us once again.

MARILYN GEEWAX, BYLINE: Hi, Michel.

SUDEEP REDDY: Hi, Michel.

MARTIN: So, Marilyn, let's start with you. We are hearing some really dire warnings about this fiscal cliff - that it could plunge the economy back into a recession that the economy is only just kind of crawling out of. And I have to ask if the threat is real or is this just, you know, political theater to get everybody's attention.

GEEWAX: Well, I think all economists agree that this is a very serious problem and no matter who you talk to, really, it's clear that this would involve plunging the country into a recession if it were to play out.

MARTIN: How come?

GEEWAX: Well, let me just take a second here to explain what the fiscal cliff is, what that term refers to. There are two things that government can have some control over when it comes to the economy. One is monetary policy, and that has to do with money. That's the Federal Reserve. That's interest rates. What's the value with the dollar, that sort of thing. Fiscal refers to budget issues - taxes and spending.

So when we hear that term fiscal cliff we know we're talking about Congress and about spending and about taxes. So - and the word cliff, well, I think anybody who's watched cartoons you know what a cliff is. It's where Wylie Coyote gets to the edge. You're running on land, everything seems pretty good, and then suddenly you drop off and you fall to some unknown fate.

So when we're talking about a fiscal cliff we have Congress dealing with taxes and spending and a big drop off. And that drop off is coming in January when a bunch of tax and spending changes take effect.

MARTIN: Mm-hmm. Sudeep, would you pick up the thread there as well and just amplify this if you would? And also, pointing out that you cover both domestic financial issues as well as international economic issues. So just talk a little bit more about what the consequences might be.

REDDY: We have a couple of issues all coming together at the same time and in this case if you look at what the fiscal cliff is, a large part of that are what we commonly refer to as the Bush tax cuts. These are the tax cuts that started in 2001 and were extended. Once they expired after a decade, they were extended again and now we've put that on a trajectory to expire at the end of this year.

There were also some temporary tax breaks that President Obama put in place, and that actually meant that tax rates under President Obama were actually lower than they were under President Bush. And when you combine both of those, those are two sets of tax breaks. And then because we've had all these budget problems over the years, we've seen the deficit and the debt rising.

The U.S. federal debt is now over $16 trillion. Congress, last year, when we were having this big standoff over raising the debt ceiling, actually being able to borrow more money, basically came up with a plan to push everything down until the end of this year and to basically delay everything and force some cuts in the budget.

And that's part of the spending cuts that take effect. There were some measures to try to maybe alter those spending cuts but that hasn't taken effect. So now we have this collision of all of these forces coming together at once. And you're starting to hear about this now with investors in the stock market getting a little bit worried about whether this will come forward.

Because, as Marilyn said, if we actually go over the fiscal cliff and let all of these measures occur at the same time, then it is certain - there's no doubt - that we will go into recession. Because everybody's taxes will go up at the same time the government is pulling back on spending, and that's an obvious recipe for a recession.

MARTIN: So let's talk a little bit about what some of those across the board spending cuts would effect. You know, the White House has been particularly loud about these $110 billion in across the board spending cuts. So, Marilyn, could you just talk about what some of the effects might be?

GEEWAX: Well, we would see actual employees getting laid off. If defense contractors couldn't go forward with the contracts that they had, they'll have to lay off workers. And another problem, though, is more long-term. When you look at what would happen to - just take one budget. Excuse me.

Say the NIH, the National Institutes for Health. They're looking at a $2.5 billion cut but they do research on things like childhood diseases, diabetes, cancer. If you cut off that spending you not only threaten the jobs - the immediate impact of disrupting that work that's being done but long-term what is the cost to the economy of having more diabetes, of more cancer?

So it's both an immediate impact as well as having a long-term impact on hurting the economy in all sorts of ways.

MARTIN: If you're just joining us, you're listening to TELL ME MORE from NPR News. We're speaking with NPR Senior Business Editor Marilyn Geewax and Wall Street Journal economics reporter Sudeep Reddy. We're talking about the so-called fiscal cliff. We're talking about what that is and what the effects could be if this actually occurs at the beginning of the year.

And, you know, we asked listeners on Facebook to post their comments about this and this is one we received from Jason Beard(ph) and he writes: The fiscal cliff is the culmination of decades of irresponsibility from both parties. Keep kicking that can, America. Let me just read one more. Here's one from Bobby Jones(ph) in Forest City, North Carolina.

The fiscal cliff, as I understand it, will be the result of Congress choosing not to work together. If they choose to work together there is no cliff. There's no indication that these folks will put aside their vested interests and act on behalf of the greater good. There's some pretty negative assessments of Congress there, Sudeep, but do people have a point?

REDDY: They have a great point and this is basically the problem. This fundamental standoff we have in Washington is - regardless if which side you're on you have to acknowledge that we have a system in which we are not taking in enough revenue to support the amount of spending we want.

So you have to deal with it on one side or another to actually come up with a budget that is sustainable over the long run, that doesn't bankrupt us as a nation decades from now. And so that's what a lot of this battle is about, is coming up with a system to deal with that.

If we were to go over the fiscal cliff, and this is the very difficult part to understand, all of these measures kick in and we are certain to have a recession at least in the first half of next year. But going over the fiscal cliff by raising taxes and cutting spending cuts the federal deficit so much that we're actually going to get fairly close to what is considered sustainable.

So the cost of going over the fiscal cliff is a recession but it also deals with some of our budget problems. Nobody really wants to just let that happen that way.

MARTIN: Isn't that like setting a forest fire to pick up your leaves?

(LAUGHTER)

REDDY: It is one to do that. And there are so many smarter ways to go about doing this and there are at least half a dozen budget plans out there that could be adopted. But you have such a huge rift now between both sides in Washington that it's not really clear how you're going to bridge that divide at this point.

MARTIN: Speaking of the how, you know Marilyn, there was this big fight about raising the debt ceiling last year and threats of a government shutdown. What are Congress and the White House going to do? Is there anything that they could be doing differently to avert this or address this? And, you know, taking note of the fact that aren't both houses of Congress supposed to recess, you know, pretty soon to go off on their November campaigning?

GEEWAX: Oh, all of these problems are really complicated by the fact that we have this election coming up. In early November everybody wants to be focused on voting. So, oddly enough, with all these giant problems looming, Congress is planning to leave town at the end of this week. The House has already said that they're going to go away and begin campaigning from now through November 13th they're coming back.

So, you know, that's an awfully long break given that they've just been off for five weeks for the August recess.

MARTIN: But do they have a plan? Is there a group that they're leaving behind to work on these issues? What's the plan?

GEEWAX: There is some indication that there's a bipartisan group in the Senate that's trying to put together some plans for what's going to happen when they all come back on November 13, and one always hopes that somewhere along the line there are a group of adults sitting down in a bipartisan way to work out some kind of agreement so that when they come back on November 13 they aren't just completely scrambling.

And maybe they are working out something, but it'll be up to that, as they call it, a lame duck Congress, the Congress that will be in session between the end of the election and before the new Congress comes in on January 1. They'll have several weeks there to try to sort out a lot of this. Presumably what they'll do is just come up with a lot of short-term compromises and allow the new Congress to make the big, big decisions.

But it's getting awfully close to the end of the year and if you're a business and you're trying to plan, you want to know what your tax situation will be next year. You want to know are you going to get that defense contract or not. And this leaves an awful lot of people hanging in limbo. And let me just add the farm bill too.

Even aside from all of these kinds of things, there are other bills that are just not getting done, like the farm bill that is sitting there. And it looks like that may be another extension. So this is really a really large cluster of problems.

MARTIN: Sudeep, is there something in particular that we should be paying attention to in the next couple of weeks or months to assess where we are in this? And I'm particularly interested in how the international markets are reacting to this. You know, a lot of attention has been focused on Europe and their sort of fiscal mess, but they seem to be moving toward resolution. What should we paying attention to?

REDDY: The rest of the world is looking at us with some befuddlement again because if you just look back at what happened last year with the debt ceiling and the big fight over that, it was a self-inflected wound that hurt the U.S. economy and hurt the global economy.

And it's hard to believe, but right now the United States is doing, on a relative basis, better than a lot of Europe is in terms of their economies, and we're doing better than most of the advanced world. And so if we don't deal with this problem, it would be another self-inflicted wound.

And it will come at a time when Europe is weak, Asia is weak, the rest of the world, if you look around, has all of these hot spots as we're seeing right now with the protests going on, and who knows what will happen in the Middle East. And if you add a new problem of our own doing on top of this, it just - it almost is like throwing in the towel.

MARTIN: Sudeep Reddy is an economics reporter for the Wall Street Journal. Marilyn Geewax is NPR's senior business editor. They were both kind enough to join us here in our Washington, D.C. studio. It was a bracing conversation. Thank you. Thank you both for coming.